Developing concept of VAT fixed establishment in the EU tax law - recent decisions by the European Court of Justice

The concept of the fixed establishment is of particular importance for EU tax law, because in the case of supply of services, it is the most directly affected fixed establishment that determines the Member State in which the value added tax ("VAT") on the supply of services is payable and, consequently, whether the supplier or the recipient should be liable to VAT payment.

In this article we analyse the two newest court decisions relevant to this concept:  Titanium Ltd. C-931/19 and Berlin Chemie C-333/20. The backgrounds of these two cases reflect the business models that have evolved specifically in the last decade, while the European Court of Justice (hereinafter: ‘ECJ’) has consistently adjudicated in line with its much earlier case law.  

Titanium Ltd. (C-931/19)

This case was brought before the ECJ to clarify whether the EU VAT Directive criterion of the existence of a fixed establishment is met where a company established and headquartered in Jersey (Titanium Ltd.) rents out its property in another Member State (Austria) without having its own staff but engaging an Austrian real estate management company to carry out the related administrative tasks. Titanium Ltd.’s (hereinafter: the 'Company') activities involved property management, asset management and the management of apartments and accommodation.

The Austrian real estate management company performed the rental management activities in separate premises from the rented property. The Company reserved the right to take decisions relating to the concluding of rental contracts and the substantive decisions concerning the leased property (implementation of investments, selection of third parties for services rendered, supervision of the property management company). These latter activities were carried out remotely by the Company (i.e. outside Austria).

The Company did not charge VAT on its taxable real estate rental activities, because it assumed that it had no fixed establishment in Austria. However, the Austrian tax authorities have ruled that a rented property always constitutes a fixed establishment and, therefore, retroactively assessed an amount of VAT chargeable on the Company. The Company then brought the case to court. The Austrian court referred to the ARO Lease judgment (C-190/95) and the Lease Plan judgment (C-390/96), which show that the concept of "fixed establishment" pre-supposes that the supplier should have his own staff and that the use of staff from another contracted company is insufficient to establish such a concept. However, the above approach is contradicted by the German case law which holds that wind farms, which also do not employ any personnel, are considered to be fixed establishments for VAT purposes, since such wind farms have significant value and high degree of stability. In order to resolve the contradiction, the Austrian court referred the matter to the European Court of Justice for a preliminary ruling.

In accordance with the ECJ’s decision, the concept of a fixed establishment implies a minimum degree of stability derived from the permanent presence of both the human and technical resources necessary for the provision of rental services on an independent basis. Since the Company did not have its own staff in Austria for the rental of the property in question, one of the conditions for establishing sufficient stability (staffing) was not met for the rented property.

In line with the above, where a company leases its property in another Member State by outsourcing all the administrative tasks relating to the leasing of the property to another company, but retains the decision-making powers relating to the leasing itself, the leased property does not give rise to a fixed establishment of the Company in the Member State concerned.

The above decision is positive for companies carrying out their property management activities remotely, as it clarifies the conditions under which it is possible to provide a rental service in another Member State without charging local VAT and thus without being registered for the local VAT purposes. Moreover, as technology advances, such business arrangements are becoming easier to operate.

Berlin Chemie A. Menarini (C-333/20)

This case has attracted growing interest among multinational companies, as the business model described in the facts of the case (performing certain corporate functions by a subsidiary established in another Member State) is very common among groups of companies operating in the Central and Eastern Europe (“CEE region").

According to the facts of the case, a German company (hereinafter: 'the Company') sells products in Romania, where it is registered for the VAT purposes. Its subsidiary, established in Romania, provided certain marketing, advertising and regulatory support services for the Company which had direct influence on the volume of the sales of the Company.

The subsidiary treated these services as not being subject to the Romanian VAT (i.e. invoiced the services to the German tax number of the Company as being out of the scope of the Romanian VAT). However, the Romanian tax authorities considered that the Company, through its own subsidiary, fulfilled all the conditions for creating a fixed establishment (having sufficient and adequate human and technical resources in Romania) and, therefore, the services provided by the subsidiary should be invoiced to the Company with the Romanian VAT charged.

However, in the light of the above background, the Court of Justice has determined that the relevant provisions of the VAT Directive should be interpreted as meaning that a company established in a Member State cannot be regarded, through its subsidiary, as having a sufficient degree of permanence and structure adequate in terms of human and technical resources for receiving services in that State.

In reaching its position, the European Court of Justice has made one other particularly noteworthy conclusion. On the basis of the facts of the case, the Romanian subsidiary provided these human and technical resources to the Company, which - according to the Romanian tax authorities - made it possible to establish the existence of a fixed establishment of the Company in Romania. However, such resources also served the purpose of providing services by the Romanian subsidiary to the Company. The Court stated that the same resources cannot be used both to provide and to receive the same services.

Thus, the Company cannot be treated as having a fixed establishment for the receiving of services in another Member State where its subsidiary provides marketing, regulatory, advertising and representation services exclusively to the Company, which services are capable of directly influencing the volume of the sales of the Company.

The conclusion of the above two cases is that a company does not necessarily have a fixed establishment in another Member State if the staff of another company provide certain services to this company in that State. However, in view of the significant importance of having staff in the context of a fixed establishment, a careful examination of the specific circumstances of the transactions in question is necessary in order to assess whether or not a VAT fixed establishment exists.

24 May, 2022

Article by Edina Bély, Tax Expert, Senior Tax Advisor of VGD Hungary